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We have a similar case now before us. As you know, France is making the last steps for restoring a gold standard, and there is felt a certain uneasiness in several countries lest France should take too much gold for that purpose. The Bank of France possesses a big reserve of gold, and I understand that it would be unnecessary for France to take more gold. But there are some tendencies in this direction; and a certain cooperation between the central banks and a certain understanding between them would perhaps attain the desired purpose, that France should abstain from taking more gold than is absolutely necessary. That would have an influence toward stabilizing the value of gold and preventing an unnecessary lowering of the price level here in this country.

I think we must, from these facts, draw the conclusion that once you have the gold standard in this country you are dependent upon all the other countries. There exists a general mutual interdependence between all gold standard countries, and if you act wisely you can use this interdependence for a good purpose. If you refuse to cooperate, the interdependence will still be there, but it will be used for bad purposes; for a reckless competition for gold with all its pernicious effects.

I have only to add a few words explaining why I believe we are faced with an increasing scarcity of gold. I have already saijd that we should not only take account of the absolute height of the pro

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the central banks have an influence on the value of gold. I want to add that this is the only point where the central banks necessarily have an influence on prices. Therefore you should abstain from adding any other duties to the central bank.^ It is not the function of the central bank to influence the relative prices of different commodities. It is not the function of the central bank to increase wages or stabilize trade or encourage industry or protect the farming interests or to do anything like that. It is not even the business of the central bank to influence the rate of interest on capital. Therefore nothing of that sort should be put into the program of the Federal reserve system.

I think I have now said what I had to say on the general program, and I shall be glad if the gentlemen present will ask me questions.

I know quite well that what I have said is not at all complete.

The CHAIRMAN. Are there any questions that members of the committee would like to ask ?

Mr. WINGO. Doctor, if the United States continues to have an exportable surplus and also continues to export capital, and thereby increase the demands on the rest of the world by way of capital and interest requirements and settlement of trade balances, that will continue to have a tendency to draw gold to the United States, will it not?

Doctor CASSEL. If the United States wished to increase their export of goods, as they really wish to do, finding new markets all over the world, and if the United States did not like very much to import commodities from other countries, the result would be a surplus in your balance of trade. But in the long run that is impossible if you do not have at the same time a corresponding export of capital.

If you have not the corresponding export of capital, the result will be that the foreign countries will have to pay you in gold, and that will be very unsound, both for the other countries and for you, because you can not use this gold for any reasonable purpose. But the question that the gentleman has asked me is a question which belongs to your general trade policy, and I think, for my part, I should keep that out, because that is a very controversial matter. It would lead us to the question of tariff walls or free trade, and I think it is better that we should keep these controversial matters out of this discussion.

Mr. WINGO. I think, Doctor, you misunderstood me. I did not have that in mind at all. I had in mind the effect on the gold supply.

I assume that we would also continue to export capital, which, of course, would carry with it interest requirements that would require settlement each year; and my assumption was that if we continued to export both capital and goods, regardless of what our policies might be, and if we continued to have a -surplus, however produced, of demand against the rest of the world that called for settlement, that would have a tendency to draw gold here.

Doctor CASSEL. Yes; naturally.

Mr. WINGO. Unless we entered into some kind of agreement to cooperate with the rest of the world so as to check that natural economic flow of gold to the United States.

Doctor CASSEL. Yes; no doubt. But, of course, you can make it easier for foreign countries to pay their debts and the interest on their debts to you if you are more ready to accept their commodities.

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reserve of gold, but would be bound to take it from other countries, ;and that makes a great difference.

Mr. LUCE. Doctor, your argument appears to assume the validity of the quantitative theory of money. There still survives in this country a few economists who do not accept the quantitative theory

-of money, and among them some gentlemen who are rather high in the Federal reserve system. Will you tell us if there remain any economists in Europe who deny the validity of that theory?

Doctor CASSEL. It is a difficult thing to tell; but I have the view that the quantitative theory of money can be stated in different ways, and if it is stated in the sound way it is undoubtedly true.

Now, I do not think that it is absolutely necessary; that we should be united on the exact validity of the quantitative theory of money, because I suppose there is nobody who denies that a very abundant quantity of means of payment in a country would always have the effect that the purchasing power of the unit of money would be diminished. If you increase the supply of money, as Germany did a few years ago, nobody doubts that the effect would be the diminution of the purchasing power of the unit of money. There is a

-certain dependence; I think we can be united in that, without entering upon the subtlety of the quantitative theory; and that is quite enough, because then it is clear that the central banks must put a certain restriction upon the supply of means of payment to uphold the definite value of their currency. I t is, enough to know that.

Mr. LUCE. Some of the gentlemen who demur at proposed action here insist that the volume of money is the result of trade demands, and not the cause.

Doctor CASSEL. Well, the situation is, of course, complicated; but what determines the trade demand for money in circulation, then?

It can never be regulated by any other factor than the conditions upon which the Federal reserve system is willing to put their means of payment at the disposal of the community. Among these conditions, of course, their rate of discount is the most important. It is their currency, and they have the power over it, and if they restrict the supply of it by sharpening their conditions, the business of the country feels it generally. The demand for currency is diminished, and the amount of currency is reduced. The ultimate power always lies with the Federal reserve system, because they are responsible for the conditions upon which to put their own currency into the hands of the public. And I venture to think that this responsibility of the central bank should be emphasized to the utmost. This responsibility was not recognized in Europe during the war and the years immediately following it, and the consequence was this immense inflation, because the central banks were unwilling to accept the responsibility. But since then we have come to the result that the central bank is absolutely responsible for the way in which it supplies the public with its notes and deposit credits.

Mr. CAMPBELL. Doctor, the Federal reserve system being the agent of Congress, which represents the people, should they not take into consideration first of all what is going to be for the best interest of the people?

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Mr. STEAGALL (interposing). Is there not a difference between the man who has labor to sell or farm products to sell and the man who is a money holder? I live in a farming country and it has always seemed that the only time when our people were able to save anything was when prices were high, because they sell more than they buy, and although what they buy goes up, if what they sell goes up their margin is higher and they are able to save something.

Is not that true for producing people?

Doctor CASSEL. Well, I think that an increase of wages and a general leveling up of the standard of the working classes is one of the prominent ends of a civilized society; but TI am most strongly of the opinion that this aim can not in any w ay be furthered by monetary measures except by the scheme which I have recommended here, that the monetary unit should be kept unaltered. A continued rise in the general level of prices would doubtless be a great disadvantage for the wage-earning classes but a fall in prices is not better.

It is very easy to say that it is good for the workman if the general level of prices is falling, that he gets more for his money, but I think that that is a very unsound recommendation. A general fall in the level of prices is bound to be followed, as I have shown here, by general economic depression and also unemployment and it results in a very great evil to the working classes.

We can not give the working classes higher wages by falsifying the monetary unit systematically; we can only do it by economic progress and by increasing the capital of the country so that more workmen can be occupied at better conditions and therefore it is necessary that a nation should save as much as possible in order to be able to increase the capital supply of the country; that is to say, to increase its supply of factories, buildings, and workmen's houses, and the supply of water power, electricity, and everything you want in the way of capital equipment.

That is the only way of real progress, and a nation must have real progress if it expects its wTorkmen to get a better standard of living, but we can not serve that purpose in the monetary field better than by keeping the monetary unit inviolate.

Mr. WINGO. Suppose that you had a limitation or restriction in this country on the importation of gold; what effect would that have on the general price level ?

Doctor CASSEL.. If you put any restriction on the importation of gold in this country, you have virtually abandoned the gold standard ; you simply say, we are not going to have the gold standard any longer; we have a paper standard.

Mr. WINGO. Suppose that you had a limitation upon the exportation of capital; what effect would that have upon the general price level?

Doctor CASSEL. That is difficult to say. It would not necessarily have any effect, because if the Federal reserve system regulated its supply according to the new situation, it would be quite possible to keep the general level of prices unaltered; but any attempt to prewent the export of capital would, of course, have bad effects on your general trade situation, and that is another question.

Mr. WINGO. Your theory, then, is that by management and cooperation, you can increase the usable volume of gold?

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Mr. WINGO. So is not the fear you have more of a theoretical fear than an actual fear ?

Doctor CASSEL. N O ; not at all. What I say is that we must, as a civilized community, try to overcome the difficulties of nature. We have to face a growing scarcity of gold; gold mines in South Africa are beginning to be exhausted. We are not going to make ourselves slaves of the situation; we are going to make ourselves masters of the situation as we have done when we invented steam power, electricity, and everything.

The CHAIRMAN. In that connection, Doctor Lehfeldt, of South Africa, since deceased, was before this committee some time ago, and he made a suggestion that, in view of the possibility of the decreasing gold supply and its effect on the monetary system of the wprld, the important countries of the world take over the management of the production of gold.

Doctor CASSEL. I know that was his view, but how could they do anything to increase the gold production in that wav? His whole idea was formed on the idea of the diamond trust, whikh is trying to restrict production in order to maintain prices, and he wanted in the same manner to restrict the production of gold in order to increase its value, or at least to prevent a fall in its value. Such a policy is, of course, in the interests of South African mine holders, not in the interest of the world.

Mr. WINGO. One other question. On account of the decreased value of gold since the war, if we undertook to assume what was relatively a normal price level, taking 1913 as 100 per cent, the price level would not have to go back to that 100 per cent in order to get a relatively normal price level, but practically at 160, would it not?

Doctor CASSEL. I consider that the present price level, or the price level you have had as an average for the last three or four years, is the level which is most desirable to keep and to stabilize, because all alterations are undesirable; and I want to add that the Labor Bureau of this country has recently made a new calculation of the general level of prices and they have taken, if I remember rightly, the level of 1926 as 100.

Would not that mean that the Labor Bureau considered this level of 1926 as to be regarded in the future as a normal level ?

If the aim is not to stabilize the price level at about its present height, I can not understand why they chose that level as 100. I think they were quite wise in doing so, but then we must draw the conclusion that we regard the new 100 of the Labor Bureau as the normal price level for the future.

Mr. WINGO. The point I had in mind was this, that all terms are relative, and when you are measuring the price level of gold you must take into consideration the fall in the value of gold since the war, and, with that fall, if 100 equalled 1913, then about 160 would be the same relative level for the present.

Doctor CASSEL. Yes; I recognize that, but we have nothing to do with the value of gold before the war. That belongs to ancient history.

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